Law guide: Employment

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Preventing ex-employees competing

Preventing ex-employees competing

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Restrictive covenants

After an employee leaves his or her employment you may like to prevent him or her from competing with you. In order to achieve this you may ask an employee to agree to restrictions upon the type of work that he or she may undertake after his or her employment has ceased. Such restrictions will prevent him or her from competing with you, soliciting customers and poaching your staff. These restrictions are known as restrictive covenants.

Validity of restrictive covenants

Restrictive covenants are only enforceable if they go no wider than necessary to protect legitimate business interests of the employer. Restrictive covenants must therefore be drafted carefully and form part of the employee's contract. Once drafted they must be reviewed on a regular basis to see if they need to be updated.

Surprisingly, a restrictive covenant restraining your employee from working in a competing business or soliciting ex-customers, may not be enforceable and may be deemed to be in restraint of trade. The prevention of competition itself is not a legitimate interest. However, protection of trade secrets and trade connections are legitimate business interests.

Types of restrictive covenant

There are three main types of restrictive covenants that are generally incorporated into one set of restrictive covenant provisions:

1. Non-compete covenants

These covenants aim to prevent an employee from competing with an employer but courts are reluctant to uphold them and they will not be upheld if their effect is to restrict competition. The employer must show that the former employee had acquired influence over his customers and will generally only be upheld if there is no other way to protect confidential information.

The area within which your employee is barred from competing must be reasonable. It must not be wider than the area within which you do business. Usually the employee will be prevented from competing in a specified geographical area, which cannot be unreasonable such as a postcode, a town or a radius from the employer's place of business. In exceptional cases national or worldwide covenants may be justified.

2. Non-solicitation and non-dealing of customers' covenants

You may be concerned that the employee may wish to take or try to take your clients and customers once he or she has left his or her position. An employer must show who is to be classed as a client or customer and will usually have to restrict the covenant to those with whom the employee dealt directly. The covenant should only be enforced for a reasonable period of time.

3. Non-solicitation of employees' covenants

You may be concerned that your employee will try to poach members of your staff once he or she has left his or her position. The covenant must specify which category of employee the employee must not poach otherwise the covenant is likely to be unreasonable and therefore unenforceable.

Time

Restrictive covenants should only restrict employees for a reasonable length of time. A time restraint in excess of 12 months can only be justified in exceptional circumstances. Most restrictive covenants are imposed for between 3 and six months depending on the nature of the business.

Breach of a restrictive covenant

If your employee has a restrictive covenant in his or her contract and he or she has acted in breach of it then you are entitled to make an application to the High Court or county court for an injunction (or in Scotland for an interdict at the sheriff court or Court of Session). An injunction will prevent your former employee from carrying on a competing business or soliciting customers, whichever is appropriate. You may also claim damages if you have suffered financial loss.